Rain on my parade
Legend has it that during the war with Sweden in the 18th century, Russia’s Peter the Great ordered church bells to be melted down and made into cannons. Battling an oil price collapse and the economic fallout from Covid-19 at the same time may require the same sort of innovative frugality.
Brent crude is trading at around $21 a barrel as markets wait for the production cuts agreed by Russia and Saudi Arabia to take hold. Under the finance ministry’s base case of a $20-per-barrel average for the year, Russia would have a budget deficit of 5% – or around $80 billion – according to Renaissance Capital. Luckily, Russia’s economic buffers are in much better shape than in 2014, when the invasion of Ukraine led to sanctions and counter-sanctions, and a fall in the oil price helped plunge the economy into recession.
Moscow has around $170 billion squirrelled away in its National Wealth Fund, more than $120 billion of which is in liquid form. RenCap analysts reckon there is enough domestic demand to absorb around $27 billion in bond issues this year. The Kremlin has also hinted of flexibility for the funds for its $400 billion development programme.
The problem is more political. In a widely viewed video, opposition campaigner Alexei Navalny has claimed the government’s various assets amount to $1,600 per citizen. That’s overegged, but President Vladimir Putin is vulnerable to popular discontent given Moscow is not, like other countries, subsidising private sector coronavirus-hit wages. While he’s grudgingly postponed a vote extending his rule and cancelled the Victory Day parade, Putin will find it tempting to push Finance Minister Anton Siluanov to splash the cash with 2.8% of GDP in extra spending.
Siluanov should resist. Like everyone else, he doesn’t know the full extent of the virus impact on public finances or how long it will last. Currently, he estimates he will use $70 billion of his rainy day fund this year. Until he knows when the downpour might stop, he should aim not to use any more.